Kota Fibres Ltd. is facing a liquidity crunch and needs to raise cash. It produces textiles and has grown sales 18% annually. However, it now has high inventory, long receivable periods, and pays large dividends. To address this, the presentation recommends: adopting just-in-time practices to lower inventory levels; reducing the credit period to collect receivables faster; lowering dividend payouts; and implementing level production to increase profits and steady cash flow. These changes would improve Kota Fibres' financial ratios and solve its short-term cash needs.

1. Case Study Presentation on
KOTA FIBRES LTD.
Presented by :- Chandresh

2. Introduction to the case study
About
• Kota Fibres Ltd
• Financial problems in KFL
Owner
• Ms. Pundir , managing director
and principle owner of the firm.
What to do?
• cash forecasting and
recommending solutions to
overcome the liquidity crunch

3. About Kota Fibres Ltd.
Founded in
Industry
Services
• 1962
• At Kota (only plant)
• Textile
• using new technology and domestic raw
materials, the firm had developed a steady
franchise among dozens of small, local
textile weavers

4. What KFL does?
KOTA FIBRES
LTD.
Suppliers
• Polyester
Pellets and
other Raw
Materials
• Spools of Yarn
Merchants
• Textiles
Mills
• Sari’s and
Textiles
End User

5. Company Performance
Consistently profitable
sales had grown at an annual rate of
18% in the year 2000
Net profits reached INR2.6 million in
2000
Gross sales were projected to reach
INR90.9 million in the fiscal year that
ended December 31, 2001

6. Major problems of KFL
line of credit at the All-India bank
loan repayments to be done to All-India Bank
Payment of excise tax to move their product
Request for new loans from All-India Bank
Interest rate may rise in upcoming year on the
loans
Declining profitability

7. Early Reassessment
Cost of goods sold
would run at
73.7% of gross
sales
Operating
expenses would be
about 6% of sales
Two new sales
agents
Addition of a
quality-control
department
Dividends of
INR500,000 per
quarter to the 11
members

8. Result

9. Financial Ratios
• Current ratio of 2000= 4684237/1443637
= 3.244
• Quick ratio = 1
• Forecasted current ratio for 2001
= 6690525/4440345
= 1.506 (< 2.0,not acceptable)
• Forecasted quick ratio = 1

10. Inventory turnover ratio
=53,865,911 / 1,249,185
= 43.12
Inventory conversion period ( in days)
= 365/43.12
= 9 days (approx)

11. • Receivables Turnover Ratio
= 64,487,385 / 2,672,729
= 24.12
• Receivables collection period (in days)
= 365/24.12
= 16 days (approx)

12. • Payable turnover ratio
= 41727114/759535
=55
• Payable turnover (in days)
= 365/55
= 6 days approx

13. Financial Analysis of the company
•
•
•
•
Dividends to be paid quarterly = Rs 5,00,000
Total annual dividend paid = Rs 20,00,000
Net profit in 2000 = Rs 25,50,837
Cash left for next year =Rs (2550837-2000000)
= Rs 5,50,837
Desired Cash Balance = Rs 750000
New loan required = Rs 1,99,163

14. WHAT ACTUALLY WE HAVE TO DO?
• To reduce the outstanding debt
• To increase the cash availability
• To enhance the cash flow

15. Some more aspects……
•
•
•
•
Huge inventory
Account receivables on liberal credit terms
High dividend payouts
Inability to pay taxes

16. Conclusions
• The proposal from Mr. A. Bajpai is good in long
term but it cannot satisfy the current need of the
company. Since the credit term is of 80 days, it
can put an unfavorable effect on the business.
They will have less cash on hand, huge amount in
bills receivables which will not allow Kota Fibres
to be able to pay off the All-India bank before
December
• It may set up precedence for other customer to
demand for an increase in the credit period

17. • Proposals from the Transportation Manager
and the Purchasing manager should be
considered seriously. It can result in less
inventory expenditures and can increase the
amount of overall liquidity.

18. RECOMMENDATION
Revise Credit
term
Pay Excise tax
on the move
Just-in-time
concept
Reduce
inventory
Decrease the
dividends
level
production

19. Credit Term
• Since the company has a huge accounts
receivable , it must check out its credit term.
• It may reduce its credit term from 45 to 30
days

20. Just-in-time concept
• Hibachi Chemicals of Yokohama can account
for 35% of our raw - material purchases
• It would reduce the inventory of pellets from
60 days outstanding to only 7 to 10 days

21. Reduced Dividends
• Since the company is providing a huge
dividend of Rs 500000 quarterly to Ms.
Pundir’s extended family, it must reduce its
dividend by 50% or go for half-yearly dividend
in place of quarterly payment
• It will provide more cash in hand to overcome
the requirements in the peak season
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22. Level Production
• Gross profit margin would rise by 2% or 3%
• Level production entails lower manufacturing
risk
• Seasonal hirings and layoffs would no longer
be necessary

23. So, the ultimate proposal….
Minimum
Cash
Balance
Partial
JIT
30 day
Inventory
Policy
Level
Production
Reduced
Dividends
More
Profit